US economic growth undershoots expectations: reaction

The US economy expanded by 2.5pc in the first three months of the year,
undershooting expectations for a 3pc rise. Here's how economists reacted to
the data.

Friday's data also suggested that more Americans had raided their savings to fund purchases. Incomes dropped by 5.3pc last quarter, while the savings rate fell to 2.6pc, its lowest since the end of 2007, from 4.7pc in the previous quarter.

We see another huge drag from government on the federal, state and local level. Consumer spending is still pretty solid. The private economy looks okay, while the government is the real drag. We have tax hikes from the consumers that should weigh on consumers and the sequester that will be a drag on the government sector. There are no reasons that things will get better in the next couple of quarters.

There's a big increase in imports with a small increase in exports so trade was a big negative. This suggests the weakness in the rest of the global economy. Trade will be a negative for the next couple of quarters.

Avery Shenfield, CIBC World Markets

Other than government spending, the U.S. economy was moving along nicely in the first quarter, but a second consecutive quarter of deep public sector cuts held GDP to a disappointing 2.5 percent pace. Defense spending, which had plunged in Q4, was again falling at a double-digit pace, surprising most analysts.

Consumer spending was very healthy with a 3.2 percent pace, but looks headed for weaker results come Q2 as earlier tax hikes start to bite. Exports were still fairly sluggish, rising only 2.9 percent and barely making up for a prior quarter decline.

As expected, a restocking of inventories contributed to growth; excluding inventories, GDP would have advanced at only 1.5 percent. Inflation readings were very tame, with the core PCE price index running at only 1.2 percent.

Add it up, and while this wasn’t a weak quarter, it wasn’t the bang up start to the year we had hoped for, and the signals from March suggested that we will only decelerate from here into the spring trimester. Bullish for fixed income, negative for cyclical equities and currencies today.

Paul Ashworth, Capital Economics

Business investment increased by a modest 2.1%, after a massive 13.2% annualised gain in the final quarter of last year. The housing recovery generated a 12.6% jump in residential investment, which was the third consecutive double-digit quarterly gain. Net external trade subtracted 0.5% from overall GDP growth, while inventories added 1.0%. In both cases, those contributions were almost the mirror images of what happened in the fourth quarter of last year. The deterioration in the incoming monthly economic data suggests that second-quarter GDP growth will be more modest. With the sequestration spending cuts beginning to bite, we could see yet another contraction in government spending. We have 2.0% pencilled in, with growth accelerating modestly in the second half of the year as the fiscal squeeze begins to fade.

Jacob Oubina, RBC Capital Markets

The report is firmer than the 2.5 percent headline suggests Overall it's a good report if you add back the drag from government. Anytime you see government shrinking, you are taking less resources from the private sector.

You will see this drag from government to continue because the sequester hasn't even kicked in the first quarter. We did lose a considerable amount of momentum in the last month and a half. Right now, we are not tracking more than 1 percent in growth. This still shakes out to be a 2 percent backdrop.

As the Fed goes into its policy meeting next week, it's been nothing but disappointing news. We are probably going to see a markdown in their economic outlook. We could hear more about continued asset purchases beyond 2013. The tone has really changed about the removal of the punchbowl. Ultimately, we should see a dovish FOMC statement with an easing bias.

Russell Price, Ameriprise Financial Services

Certainly it's a little bit disappointing, but I think the underlying data is supportive. The idea that consumers held up pretty well in the face of the payroll tax hike is encouraging for the economic pace going forward.

The government was the big negative. Even though we saw a big drop in defense spending in the fourth quarter, there was an additional decline in Q1. I was looking for a much more modest decline.

It's really related to some sequester impact and defense related. But the encouraging signs in the report are the continuation of consumer spending attitudes and business investment remain pretty solid.

Omer Esiner, Commonwealth Foreign Exchange

Clearly, worse than expected number in terms of GDP. The one bright spot was an upside surprise to consumer spending in the first quarter, but still not likely enough to offset the overall miss in the headline. Expectations were lower getting into this number as a result of the very weak durable goods orders that we saw from March. So on balance, the number is consistent with worries that the economy lost momentum at the end of the first quarter.

The Telegraph Investor

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